JOURNALS OF ROBERT MAAS

Wednesday, March 31, 2010

BLOG 81

TAXPAYERS MAY HAVE HUMAN RIGHTS AFTER ALL

To date taxpayers who have claimed recourse to the Human Rights Act in tax appeals have had little success. So have taxpayers who have sought to avoid penalties for errors in relation to the Construction Industry Scheme (CIS). HMRC seem to expect the construction industry to be far more conscientious and more knowledgeable about tax than other businesses of a comparable size.

The problem with the Human Rights Act 1998 is that the right most likely to be infringed by the tax system is the protection of property and the law caveats that by allowing the State to deprive a person of his property “in the public interest”. The public interest in the efficient collection of taxes wins hands down virtually every time.

The decision of the First-tier Tribunal in SKG (London) Ltd is accordingly a breath of fresh air. SKG is run by Mr Higgins and his son. It started in March 2008, taking over Mr Higgins’ family business. It supplies conservatories. Mr Higgins handled his own VAT but his accountants handled the payroll. In February 2009 Mr Higgins felt that he had got the VAT into a muddle and called on his accountants for help. The accountants reviewed the records and discovered that in July 2008 the company had used a sub-contractor and the sub-contractor had invoiced the company for his services net of tax. The accountants told Mr Higgins that he should have registered under CIS and that he owed the tax to HMRC. The accountant registered the company for CIS and sent a return for the month to 5 August 2008 together with a cheque for the tax to HMRC on 11 March 2009. The form declared that the company did not anticipate paying any sub-contractors in the next six months – which by March had, of course, already passed. The payment was a “one-off”.

So what did HMRC do? Say “thank you” and ask if the company envisaged using sub-contractors in the future? I don’t know. What I do know is that in February 2009, i.e. just after it had been asked to register the company for CIS and without waiting for submission of any CIS returns, HMRC sent the company two penalty notices for £700 and £2,100 respectively. The £700 was a penalty of £100 a month for each of the months from 5 August 2008 to 5 March 2009. It should be noted that the return for the month to 5 March 2009 was not even overdue; indeed the month hadn’t yet finished on 28 February 2009 when the notice was issued. The £2,100 was a further penalty of £600 for the September return, £500 for the October one and so on because the CIS penalty is £100 per month for every month the return is late.

The tax legislation provides that where a person had a reasonable excuse for not doing something required to be done by the due date, he is deemed to have done it by that date if it did it within a reasonable time after the excuse ceased. Mr Higgins’ accountant said that the company had been honest throughout, the delay had been due to its proprietors failing to understand the tax system, and that the problem had been rectified as soon as the accountants identified it. HMRC told the Tribunal that, “HMRC take the view that a “reasonable excuse” is confined to one where an exceptional event beyond a person’s control has prevented the person making a return on time”. I must say that’s news to me. I have specialised in tax for 45 years and have never heard that before. It is certainly not what the legislation says.

Mr Higgins also said that a penalty of £2,800 for paying £1,119.40 seven months late is disproportionate and unfair. Proportionality, like Human Rights, is a European concept. The Tribunal thought that Mr Higgins might have a point and adjourned the case to hear arguments on proportionality. HMRC subsequently decided to withdraw the penalty notices.

Accordingly it is still not clear to what extent proportionality applies to fixed penalties. It is however clear that if a taxpayer thinks that penalties are disproportionate he should raise human rights as a defence. It may be that, as in this case, HMRC will, on reflection, feel disinclined to contest the point.

Stephen Timms made a very interesting written statement to Parliament at the end of February. He told them (as has since been confirmed in the Budget) that the government would introduce legislation in the Finance Bill to clarify that for corporation tax purposes all UK distributions are income in nature unless a specific rule says otherwise. That is good news. However the interesting bit is the background.

He explained that before 2005 it was possible to interpret the law in that way. However the rewrite of the law in the Income Tax (Trading and Other Income) Act 2005 “made that view impossible to sustain”.

What I find interesting is –

1. I, and everyone else I know, including HMRC, did not find that view impossible at all, at least up to 2009. Indeed s 383(2), ITTOIA 2005 says, “For income tax purposes [dividends from a UK resident company] are to be treated as income …it does not matter that those dividends are capital apart from that section”. I don’t myself think it “unsustainable” that that means that dividends of a UK company are not capital for tax purposes.

2. A Rewrite Act, such as ITTOIA is not permitted to change the law except in minor respects. If it is found that it has done so, HMRC normally tell Ministers who change the law back without any fuss in the next Finance Act.

What seems to have happened here was that in 2005 the Companies Acts did not permit a reduction of capital, or at least made it difficult and expensive to do so. They now do so and these are becoming fairly popular. The result is that a UK subsidiary company can redeem the shares held by its parent with the proceeds being deemed to be a dividend and, as such, being franked investment income of the parent company, which is exempt from corporation tax. Someone in HMRC seems not to have disliked this and HMRC have been contending that where a company does not have sufficient distributable reserves the distribution is capital and as such attracts corporation tax on capital gains.

In other words the problem does not seem to be that the rewrite changed people’s understanding of the law. What seems to have happened is that in pursuance of its off-stated policy of seeking to collect “the right tax at the right time” HMRC decided to mount an argument that the right tax cannot be the amount that the law says, because that would mean that no tax is due. In other words the right amount in HMRC parlance seems to mean not what parliament has determined, but rather as much as possible.

Accordingly the proposed change in the law seems to be a face-saving device. It would be embarrassing for HMRC to have to admit that they tried to get away with collecting tax that was not due, but the same result can be achieved by changing the law retrospectively so that the tax that was not due, but that they tried to collect, again becomes not due. As section 383 seems pretty clear to me I look forward with interest to seeing what change to the wording the government have in mind.

Monday, March 29, 2010

I do not intend to use up space by reproducing my firm’s Budget booklet that we prepared for clients. If anyone would like a copy, let us know (mail@blackstones.co.uk).

However there was one proposal that really worries me and I thought it might be sensible to give my comments on this wider circulation, so her goes:

Tackling Offshore Tax Evasion

Legislation will be introduced in Finance Bill 2010 to impose larger penalties on taxpayers who fail to provide a full account of their income tax or CGT liabilities where the failure is linked to an offshore bank account.

The proposal is that the world will be divided into three parts:

a) Countries with which the UK has both a full double tax agreement and a Tax Information Exchange Agreement (TIEA).

b) Countries with which the UK has a full double tax agreement but no TIEA.

c) The rest of the world.

Where the bank account is in a country within Category A the normal penalties will apply. If it is in Category B the penalties will be 150% of the normal penalty. If it is in Category C it will be 200% of the normal penalty.

Blackstone Franks’ Reaction:

It is noticeable that some of the changes proposed in the budget (such as this one) will be included in Finance Bill 2010 and others will be included in a Finance Bill to be introduced as soon as possible in the next Parliament. The normal procedure in an election year is to have either a very short Finance Bill containing only the rate changes, or to have a normal Finance Bill but to drop the part of it that has not fully been debated by parliament by the time that parliament rises. There is a rumour going round that this year the two main Opposition parties have agreed with the government that they will co-operate in putting a large number of provisions on the statute book with little or no debate and little or no regard for the rights of the citizen that such undebated legislation removes. We hope that this rumour is wrong. We particularly hope that the Opposition parties will not agree to bulldoze this provision onto the statute book without debate:

a) because it has not been subject to public consultation – the government consulted on a different proposal and have decided to adopt the above instead;

b) because although headed “Tackling Offshore Tax Evasion” it goes far beyond evasion and will penalise, amongst others, immigrants from overseas countries who omit to declare income arising in their home country, not deliberately but because they do not understand the tax system, cannot afford to buy advice on how it affects them, and are unlikely to be given helpful advice from HMRC helplines.

c) the proposal is discriminatory and penalises people for things outside their control, such as having been born in a particular country; and

d) the response is wholly disproportionate to the problem at which it is aimed.

Take for example nurse Ann and nurse Betty. They both work for the NHS. Both came here 15 years ago. Both intend to return home at some stage. Both live frugally and have saved some money out of their meagre earnings, which they send home every month. Accordingly both are earning interest in their home country. Both come from the Caribbean. Nurse Ann comes from Anguilla. Nurse Betty comes from the neighbouring island of Barbuda. They are both “non-doms”. Neither realises that, although the bank interest was not taxable here up to 5 April 2008, the law changed from that date. HMRC learn about the interest and think that Ann and Betty ought to have known that the law changed and demand penalties from them.

The UK has both a double tax agreement and a TIEA with Anguilla. It has a double tax agreement but no TIEA with Antigua and Barbuda. Accordingly Ann comes from a Category A country and is liable to a minimum penalty for having made a careless mistake of 15% of the tax on the bank interest. Betty comes from a Category B country and is liable to a minimum penalty of 22.5% for having made exactly the same careless mistake. Is that reasonable? It is not her fault that the UK and Antigua and Barbuda have not yet got round to agreeing a TIEA. As they entered into a double tax agreement it is likely that they will in due course enter into a TIEA too.

Friday, March 26, 2010

BLOG 78

WHY CURIOUS?

I was reading an article recently in Taxation magazine about the recent tax Tribunal decision in D J Thresh v HMRC. I was struck by the author’s comment that, “Curiously, the Tribunal found in favour of Mr Thresh”. HMRC had contended that Mr Thresh had obtained a benefit from employment from his own company. The Tribunal decided that he had not. Why should that be curious? We have surely not yet reached the stage where it is not possible to do anything without creating a tax liability!

The facts in the case were fairly straightforward. Mr Thresh was the sole director and shareholder of Hunt’s Construction Ltd. The company entered into an arrangement with a Mr Baxendale that it would build three cottages on land held by Mr Baxendale and Mr Baxendale would keep one of these and transfer the other two to the company. The company intended to finance the development by raising a mortgage on the land. However this intention was thwarted because Mr Baxendale’s solicitor advised him not to transfer the land to the company until the cottages had been built.

So what could be done? Mr Thresh proposed that he should raise the money personally and finance half of the development costs in return for being given one of the cottages. Accordingly there became a three-way joint venture, Mr Baxendale would put in the land, Mr Thresh would provide a large part of the finance needed to make the deal happen, Hunt Construction Ltd would provide the building expertise and they would each take one of the completed cottages. If I entered into such an arrangement with a couple of neighbours I would be most surprised if HMRC were to claim that the house that I ended up with somehow gives rise to income.

I accordingly found nothing “curious” about the Tribunal’s decision. It seems to me to reflect commonsense. Perhaps that is the author’s concern. Maybe he feels that in recent years tax and commonsense have drifted so far apart that it is not possible that a commonsense solution to a commercial problem cannot create as a by-product a tax liability.

Monday, March 22, 2010

I was sitting at home the other evening eating dinner and vaguely watching the TV between mouthfuls when at the end of the commercial break I noticed the legend “Sponsored by HM Revenue & Customs”.

I was intrigued. HMRC seem to me to be squeezed of resources. They look to have cut down substantially on enquiries. Their recent spate of “Disclosure opportunities” seem to be designed to raise cash quickly without having to incur the expenditure that would have allowed them to collect the much higher penalties that they have previously always sought from tax evaders. They seem to have come to the professional bodies with a begging bowl to try to promote joint training at joint cost.

So why are they spending taxpayers’ money sponsoring TV programmes? I don’t have a clue. They did come up with some slogans. The ones I noticed were: “Knowing the right ingredients helps you to succeed in business”; “Accurate paperwork is important to success in business”; “Cultivating opportunities is important to success in business”; “Being in tune with the market is important to success in business”.

What do all these have in common – apart that is from the copy writer being obsessed with the phrase, “important to success in business”? How about none of them mentions tax. Indeed none of them has any obvious connection with tax. The programme had nothing to do with tax either. It was one of those reality programmes where a millionaire business person patronises a couple of small businesses by expressing feigned surprise that a person who has come up with an idea and sought to exploit it does not know how to go about converting the idea into a viable business. Of course the businesses concerned are given some free advice in return for agreeing to have their naivety exposed on national TV. They may well feel that a fair price to pay for the help, in which case good for them.

But I am still puzzled why HMRC should think it sensible to spend your and my taxes sponsoring such a programme in order not to promote the importance of getting tax right, the need to think about tax consequences from day one, or even that successful businesses are happy taxpayers, but simply to suggest non-tax attributes that can contribute to business success.

If any reader can understand what on earth is going on, please explain to me how this is a sensible way to spend our taxes.

Wednesday, March 17, 2010

BLOG 76

HMRC ACTING “FAIRLY” YET AGAIN

What do you think ought to happen when HMRC think that you owe tax and raise an assessment on you because you have not declared it, and you appeal against the assessment because you do not believe that you owe the tax and think that you will be able to demonstrate that you don’t?

Well, the law says that you still have to pay the tax; you can’t hang on to the money until the appeal is heard. Of course paying the tax may mean that you can no longer afford to appeal. Does that sound fair to you? It doesn’t seem at all fair to me. However don’t blame Alistair Darling. This was the brainchild of former Chancellor Denis Healey.

Actually it is not quite that bad. You can ask HMRC to hold off collecting the tax until your appeal is heard (as HMRC had to do in the pre Denis Healey days (they had no discretion then)) and if they refuse you can appeal to the tribunal (or before 1 April you appealed to the General Commissioners, an unpaid body of ordinary citizens who most of us thought were renowned for their commonsense).

So the system is fair after all? Tell that to Mr Rogers! HMRC assessed Mr Rogers for tax of 2.7m, which he believes he doesn’t owe. Mr Rogers duly appealed in November 2006 and asked for postponement of the whole of the tax. HMRC agreed to his request. Then 20 months later they changed their mind and asked the General Commissioners to require Mr Rogers to pay the whole £2.7m. The Commissioners fixed a date for a hearing to decide the matter. Mr Rogers’ advisors told the Commissioners that neither they nor Mr Rogers could attend on the day they proposed. So, exercising their renowned commonsense, the Commissioners went ahead without them! HMRC turned up and told the Commissioners that Mr Rogers was seeking to dissipate his assets. They don’t seem to have put forward any evidence to suggest that, but I assume that those Commissioners worked on the non-legal maxim that “there’s no smoke without fire” and they accordingly ordered Mr Rogers to pay the £2.7million.

Many would find it surprising that any body of Commissioners would make such an order for such a large sum without having heard the taxpayer’s side of the story and without, it appears, even bothering to ask whether Mr Rogers was still contending that he owed the money. Personally I am amazed that they did not adjourn the case to hear Mr Rogers.

Where the Commissioners order such a payment and there is a later change of circumstances, either side can ask the Commissioners to reconsider. Mr Rogers engaged new tax advisors who pointed him to an old tax case that might well support his view that he did not owe any tax. Furthermore new information to quantify the amount owed, even if HMRC’s view were to turn out to be right, had become available.

So what did HMRC do next? Wait for the Commissioners to hear the application? No, that would be the fair thing to do. HMRC and fairness seemingly don’t go together. HMRC issued a High Court writ for the £2.7million.

Next the Commissioners heard the taxpayer’s applications. HMRC contended before them that there had been no change of circumstances so they had no power to change their order. After “lengthy consideration” the Commissioners agreed. Mr Rogers appealed to the High Court against the Commissioners decision. In response, HMRC applied to a different bit of the High Court for summary judgement for the £2.7million.

The case came before Mr Justice Floyd. HMRC’s case that is. The High Court has not yet heard Mr Rogers’ application to review the refusal of the Commissioners to reconsider their decision. No one has yet heard Mr Rogers’ appeal against the assessment, so no one yet knows whether or not he owes any tax. The only issue was that HMRC wanted the judge to give summary judgement for the “debt”, presumably so they could go on and bankrupt Mr Rogers. What does it matter whether the tax is legally due? The Chancellor could do with £2.7million so does it really matter what Mr Rogers’ tax liability, if any, really is?

Fortunately for Mr Rogers – and many, including me, would say, for justice – Mr Justice Floyd not only dismissed HMRC’s application for summary judgement but stayed the action.

He thought that a change in legal advice could amount to a change of circumstances and, indeed, that the request for reconsideration has a realistic prospect of success. Whilst he accepted HMRC’s contention that bankrupting Mr Rogers for tax that he may not owe does not wholly deprive him of the right to fight his case, as his trustee in bankruptcy might be prepared to make funds available to fight it, and noted that HMRC had pointed out that if after having been bankrupted Mr Rogers won his case HMRC would not only repay the tax but would pay simple interest as well, he did think that Mr Rogers’ bankruptcy would be “an unjust result … the effect [of which] will not be capable of being remedied by a simple repayment with interest”.

When HMRC put into their new Your Charter, “What you can expect from us … treat you even-handedly”, do you think they had their collective tongue pushed very firmly into their cheek? Or do you think that the above simply reflects their idiosyncratic interpretation of “even-handedly”? To be fair, the Charter does not actually say that HMRC will treat taxpayers “fairly”, so even-handedly could mean that they intend to try to bankrupt everyone for tax that they may well not owe!